PIMCO’s “new normal,” as technically defined, hasn’t happened—at least not yet. While overall global growth was muted last year (2.2% last year compared with 3.2% for the decade before the 2008 crisis) demand for stocks and bonds was robust, largely stoked by central bank action.

Data compiled by Bloomberg found that “fixed-income securities around the world returned more than the average of the past 16 years in 2012, and the value of global equities increased by $6.5 trillion as the MSCI All-Country World Index rose 13.4%.”

PIMCO, which oversees the world’s largest bond fund and manages $1.9 trillion in assets, coined the term in 2009 to describe sluggish global growth and lower investment returns for the foreseeable future.

What they didn’t foresee, according to the news service, were the steps central banks would take. Citing Bianco Research figures, Bloomberg notes, “policymakers from the Federal Reserve to the People’s Bank of China pumped more than $6 trillion into the global economy as they bought everything from Treasuries to gilts, boosting their balance sheet assets to $14.09 trillion as of June 2012 from $4.99 trillion.”

At the same time, the central banks kept global interest rates at about record lows, driving investors into riskier assets such as stocks, junk bonds and mortgages.

But the bond giant is sticking by its original prediction.  

“Policy distortions cannot continue indefinitely,” Saumil Parikh, PIMCO’s co-head of asset allocation strategy, wrote Friday in an email to the news service. “2013 will be a year of reversion to the medium-term ‘new normal’ view for both the economy and financial markets.”

The Standard & Poor’s 500 Index gained 13.4% in 2012, while bonds around the globe returned 5.7%.

Bill Gross, co-CIO, PIMCO (Photo: AP)In his latest monthly outlook, PIMCO head Bill Gross sounds the inflation alarm. The Fed in its fourth round of quantitative easing, or QE4, is now writing $85 billion of checks to buy Treasuries and mortgages every month, and there’s really nothing backing those checks other than trust, writes Gross (left) in “Money for Nothin’, Writing Checks for Free.”

The future price tag of printing such checks is inflation and currency devaluation, Gross warns, while blaming the Fed’s Dec. 12 decision to set rates based not on date targets but rather on specific unemployment and inflation rate levels.

Economic growth “now is to be measured each and every employment Friday via an unemployment rate thermostat set at 6.5%,” Gross writes. “We at PIMCO would not argue with that objective. Yet we would caution, as Bernanke himself has cautioned, that there are negative consequences and that when central banks enter the cave of quantitative easing and ‘essentially costless’ electronic printing of money, there may be dragons.”

Read PIMCO’s Gross QE4 Warning: Here Be Inflationary Dragons at AdvisorOne.